ERM and other practice areas

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Enterprise Risk Management

This page covers the Enterprise Risk Management (ERM) practice area. What is ERM, how can companies use it to advantage and how can actuaries can get involved in this growth area?

What is ERM?

Downside risks can be managed, using controls and mitigations e.g. insurance. More recently the ERM concept has been emphasised, with its two key features:
In reality the situation is more complex and interesting than the two points suggest. "Holistic treatment" can mean technical aggregation and an administrative/cultural organisation of risk. Upside risk can be considered as a culmination of steps:

How can companies use ERM?

Most companies say they want to maximise profits or stakeholder value. Alternative metrics exist for non-corporates. But profit rarely exists without risk, so it makes sense to maximise profit net of risk or, equivalently, to optimise risk and return.

How can actuaries get involved?

Actuaries obtain a broad understanding of risk, through the professional examinations and practical business experience. Actuaries have experience of risk within financial institutions, especially insurers and pension schemes.

The introduction of the Chartered Enterprise Risk Actuary (CERA) qualification through the ST9 exam gives actuaries the opportunity to extend their skills and to market them beyond their traditional fields of expertise. This is a key aim for the profession.

What are the main challenges for ERM actuaries?

Aspiring ERM actuaries face several potential challenges:
  1. Collaboration skills: Risk needs to be managed from the operational to Board level and from front to back office. This requires collaboration and influencing skills.
  2. Breadth of knowledge: Risk management actuaries working in traditional fields (e.g. insurers) consider a variety of risks including insurance, credit, liquidity, market, operational and group risks. Actuaries in wider fields, especially in non-financial companies, may need to develop additional skills e.g. the management of strategic risk and any sector-specific risks.
  3. Breadth of approach: Risk management is more than getting the "right" amount of capital and having a fully populated and "accurate" risk register. Multiple risk metrics may need to be considered, balancing the needs of stakeholders. Measuring some risks may be challenging. A blended approach of art and science, with quantitative and qualitative aspects, may work best.
  4. Optimisation skills: Actuaries working in capital management have been familiar with dependence and correlation of risks at least since the introduction of the ICAS regime in 2004/5. But although risk adjusted returns have been discussed since the 1980s such approaches are not particularly prevalent. Here is opportunity.